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Reserve Bank tipped to keep rates on hold

NZN 16/06/2017 Rebecca Howard

Reserve Bank governor Graeme Wheeler is expected to keep rates on hold at next week's review and stick firmly to a neutral stance, in particular after softer-than-expected first quarter economic growth.

On Thursday, Statistics New Zealand said the economy only expanded 0.5 per cent in the three months ended March 31 as building activity and investment shrank.

Economists had been expecting growth of 0.7 per cent while the central bank had been expecting the economy to expand 0.9 per cent.

Economists at Citi said given the RBNZ was tipping much higher growth "the miss would provide governor Wheeler with more ammunition to keep the policy stance neutral at next week's official cash rate announcement".

All 16 economists surveyed by Bloomberg expect no change in the official cash rate at next Thursday's review.

The gross domestic product data "supports our view that the RBNZ is likely to sit on its hands and keep the official cash rate unchanged at 1.75 per cent for an extended period. We maintain our view that the RBNZ will not hike interest rates until late 2018," said Kiwibank chief economist Zoe Wallis.

Capital Economists Australia and New Zealand economist Kate Hickie said 2018 "is still too hawkish" for the next rate hike.

She doesn't expect the central bank to pull the rate hike trigger until there is a sustained pick-up in wage growth that filters through to core inflation and "with that unlikely to happen for some time yet, we don't expect rates to begin to rise until early 2019".

The latest jobs data showed the unemployment rate fell to 4.9 per cent in the three months ended March 31 from 5.2 per cent in the December quarter but wage inflation remained muted.

In May, Mr Wheeler kept the official cash rate at 1.75 per cent, as expected, but surprised some in the market by affirming the bank's neutral bias with the benchmark rate unchanged until September 2019 when it rises to 1.9 per cent.

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